Retiring with Stocks vs Retiring with Real Estate

What are you doing to prepare for retirement?

I am afraid the answer is most likely nothing. According to a CIBC poll, a whopping 90% of participants surveyed said that they do not have a plan in case to make their desired retirement lifestyle a reality (source). And 26% do not even have any idea what their “retirement magic number” would be.

But let us suppose you did put some thought into what you would need to do to retire comfortably. What would your retirement magic number be? Well, according to the same CIBC poll, the average amount Canadians feel they would need in their personal savings to retire comfortably is $756,000.

$756,000 is certainly seems like an impressively high number. But let us take a closer look at whether even this amount will let you truly give you the retirement lifestyle of your dreams. If your retirement nest egg of $756,000 has a 7% annual return, you could withdraw $5,000 per month for 21 years. Even if you are perfectly happy living on $5,000 per month, you would be able to live comfortably until you are 86 years old, assuming you retire at 65. But what happens if you live to be 90? Or 100 years old? How would you sustain yourself financially if you live a longer than your retirement plan anticipated?

Here is another thing to consider when thinking about your retirement: the nest egg of $756,000 would only be able to sustain you until you are 86 years old if it continues to grow at 7% per year. If you consider that the interest rates in savings accounts is practically zero, having $756,000 in your personal savings account and withdrawing $5,000 per month from it becomes untenable. What you would need to do instead is to put your money into some investment vehicle which will continue to grow your money. The investment vehicle which most people would normally turn to is the stock market. If you conduct a quick Google search, you might think that the stock market would be a good place to put your nest egg since the average yearly growth is apparently 10%. But that kind of stock market growth is over the long term. In the short term, the stock market experiences many fluctuations. If you are no longer working and relying on your retirement savings to live, how comfortable would you feel having your savings suddenly drop by 30% in value? For example, imagine your retirement savings was in stocks and you retired just as COVID-19 hit. Additionally, the often-cited growth of 10% in the stock market does not taken into consideration the management fees which financial planners take for themselves, regardless of whether or not your portfolio made any money.

Is it any wonder, then, that the majority of Canadians are not prepared to make their desired retirement lifestyle a reality? It is easy to blame laziness, lack of education, or naïve optimism for people not doing enough to plan for their retirement. But the simple fact is that planning for your retirement is hard; if it were as easy and effective as putting your money where the banks tell you to, I doubt 90% of Canadians would lack a proper retirement plan.

So what would happen if instead of continuously investing in stocks or placing your trust in the bank, you decided to invest in an income property?

Take a moment to think about how even being able to purchase one piece of real estate could change your life. Imagine you purchased an income property for $400,000. But of course, you do not need $400,000 cash to purchase this asset; the great thing about real estate is that banks are willing to lend you a mortgage to purchase it. And because you can use leverage to purchase real estate assets, you can acquire real estate by paying for a fraction of its value out of your own pocket.

Typically, real estate investors like to purchase properties with 20% down payment. So if we follow this rule in purchasing an income property valued at $400,000, you would only need to pay $80,000 as a down payment; the remaining $320,000 to purchase the property comes from the bank. But getting a loan from the bank comes at a literal cost; you need to make monthly mortgage payments on your income property. You would also have other expenses on the income property such as property insurance, repairs, property taxes, and so forth. Fortunately, the remedy to paying all of these costs is straight forward: have your tenants pay for them. If all of your expenses per month totaled $2,400 but your tenants are paying you $2,700 rent per month, your tenants are paying you to hold onto your real estate asset. The key, then, to picking a profitable income property is to make sure that you are able to collect enough rent to cover all of the expenses on the property, not just the mortgage payments.

So what kind of profits can you expect when you purchase a good income property? Let us suppose you were patient enough to hold onto the property until your tenants pay off your $320,000 mortgage. Because you only paid $80,000 to purchase your income property, your return on investment would be at least 400%! I say at least because we have not yet factored in property value appreciation over time. If we take appreciation into consideration, your return on your investment would be far higher still.

But beyond talking about returns on investments, think about what owning another house mortgage free would practically do for your retirement. Firstly, that portion of your rental income which was going towards paying off the mortgage can now go towards funding your dream retirement lifestyle. With a $320,000 mortgage at 2.39% interest and a 30 year amortization, your monthly mortgage payment would be $1,357.61. And provided you keep your income property tenanted, you will be able to earn $1,357.61 from your income property for the rest of your life! So by investing in an income property for your retirement, what you are doing is creating a pension plan for yourself, one that you fully own and control. Secondly, if you prefer a big payday, you could sell the income property without needing to worry about paying a mortgage back. How would it feel to get a bank draft of at least $400,000 when you retire and being able to pocket that entire amount for yourself? And thirdly, a real estate asset is something you can pass down to your children so not only would you have increased your personal wealth, you would have also created generational wealth. Think about what the life of your children and grandchildren would be like if you gave them an asset worth over half a million dollars.

If you have read this far into my article, you are probably really interested in purchasing real estate. But I bet you still have a lot of questions. How can I afford to purchase real estate when all of the homes around me cost so much? How do I manage tenants? Where can I find great real estate investing deals?

If you are interested to learn more about how to get started in real estate investing safely and profitably, let’s connect and start that conversation together!

Until then, happy investing!

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